Davis-Bacon: A Costly Contradiction

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88 June 14, 1979 DA VIS-BACON: A COSTL Y CONTRADICTION
INTRODUCTION An obscure labor law, the Davis-Bacon Act, is costing
the federal government at least three-quarters of a billion dollars
a year in wasteful construction costs. It is also restricti ng
minority entry into the construction crafts and shrinking the value
of Section 8 housing subsidies for the poor and elderly intended
to. protect local contractors and labor from the cutthroat
competition of intinerant contractors and their poorly paid e
mployees. The Act mandates that for every federal construction
project in excess of 2,000 the Secretary of Labor will establish as
the minimum wage the wage prevailing for a Ilcorresponding class
'of laborer in the city, town, village, or civil subdivisio n in
which the work is to be performed."

The General Accounting Office (GAO) has culminated two decades
of oversight with a 1979 report urging Congress to repeal the Act.
It charges that the Department of Labor has failed consistently to
correctly determin e the appropriate prevailing wage. Confirming
several academic studies, the GAO found that the Department of
Labor often incorrectly established collective bargining rates as
the prevailing wage. Labor's predilection for union rates explains
the vigor wit h which organized labor has defended Davis-Bacon
Passed in the early years of the Depression, Davis-Bacon was This
year, congressional opponents have intmduced a number of bills
aimed at repealing Davis-Bacon. Representatives John Erlenborn
(R-Ill.) and To m Hagedorn (R-Minn.) are leading the House efforts.
In the Senate, Orrin G. Hatch (R-Utah) and John Tower (R-Texas) are
the most persistent opponents of Davis-Bacon 2 The House, on June
6, rejected a floor amendment'offered by Congressman George Hansen
(R- I daho) which proposed to strike the Davis-Bacon provisions
from federally financed Indian housing and neighborhood self-help
programs. Despite this setback, there have been some recent
decisions which opponents of Davis-Bacon find encouraging. The
Senate A r med Services Committee voted 11-5 on June 6 to eliminate
Davis-Bacon provisions from military construction. A recent ruling
by the United States Court of Appeals for the Fourth Circuit,
Commonwealth of Virqinia vs. Ray Marshall, permits judicial appeals
b a sed on a denial of due process or non-compliance with statutes
or regulations. The Secretary of Labor is still not subject to
judicial review on the basis of fact or substance. Ben Blackburn,
president of South eastern Legal Foundation, which assisted Vir g
inia in the case was enthusiastic about.the outcome The Labor
Department has now been told that it is not above the law. The
result should save American taxpayers many millions each year THE
ACT Since 1931 Congress has extended the prevailing wage pro vis i
on to include not only federal construction but numerous
federally-assisted projects. Additional amendments introduced
fringe benefits into the prevailing wage calculation and explicit
ly placed responsibility for prevailing wage determination with the
Se cretary of Labor.

Determination of the appropriate prevailing wage has been
delegated to the Wage and Hour Division of the Department of
Labor's Employment Standards Administration. The minimum wages are
established primarily on a project basis, although t he Wage and
Hour Division alsb maintains a geographical listing. In 1977, for
instance, there were a total of 17,931 wage determina tions, 15,674
of which were on a project basis.

Interested parties may petition the Wage Appeals Board to
overturn the disp uted rate. The burden, however, is on the
contractor to protest. To support a petition, the protesting
contractor must often generate his own suney, a substantial expense
with little prospect of reward ADMINISTRATION After nearly 50
years, the Department of Labor has not developed an effective
program to issue and maintain current and accurate wage
determinations; it may be impractical to ever do 3 so. Irl
flaws.

The GAO supports this claim with a compedium of Labor's The
first charge is that Labor simply assumes that union rates prevail.
In an analysis of 73 wage determinations, the GAO found that about
one-half were based not on Department of Labor sumeys, but rather
on union-negotiated rates Table 1 Table 1 Wage Determination
Supported and Not Supported by Surveys Conducted by Labor Region
New York Atlanta Chicago Dallas San Francisco Total Project de
tennina t ion NO Total survey Survey 15 5 5 15 3 7 13 7 3 15 6 4 9
1 15 28 22 73 Area determination Totals No No survey Survey survey
1 9 5 3 1 9 2 9 5 1 3 5 10 Source: General count,ng Office The GAO
also analyzed 530 area determinations Survey 6 12 4 6 10 38 and
found that 302 (57 percent) were based on collective bargaining
agreements not surveys. Since nearly 75 percent of Davis-Bacon
projects use area de terminations, the GAO findings reveal an
expensive flaw in Labor's procedures.

The Davis-Bacon Act is not administerable because so much of the
necessary information is compiled on a strictly voluntary basis and
from a multitude of sources. The GAO found t hat Labor 1. U.S.
Comptroller General, The Davis-Bacon Act Should Be Repealed HRD
79-18 Washington, D.C.:General Accounting Office, April 27 1979 4
not only lacked a consistent methodology but also capriciously
deleted and added wage data. Furthermore, La b or biases its
determination by including previous Davis-Bacon projects in the
calculations. The Department of Labor compounds these difficul ties
through a biased interpretation of "prevailingtt wage, arbi trary
job classifications, and the importation of urban wage rates into
rural areas 30 Percent Rule To determine the prevailing wage, Labor
will first ascertain whether a majority of workers receive the
exact wage rate not, Labor will establish as prevailing any wage
paid to 30 percent of the appropriate workers. Should no single
rate exist for at least 30 percent, Labor will set as prevailing
the average rate If The use of the 30 percent rule seriously
distorts the prevail ing wage. The requirement that both the
majority and 30 percent rule be based on t he same wage, to the
penny, distinctly favors unions, since typically all union members
receive the same rate.

Non-union wages often vary according to experience and producti
vi ty As an illustration of the effect of the 30 percent rule, GAO
cited a painti ng contract in Carson City County, Nevada. Labor
established 12.40 per hour as the minimum wage. Although as table 2
shows, 30 percent were paid that rate, all of the remain ing
painters were paid less. The average rate, which Labor also uses in
its calcu l ations, was $9.52 per hour, 23 percent less Table 2
Carson City County Survey Number of painters employed Hourly wage
rate paid 6.25 8.74 9.00 12.40 It is possible that the.30 percent
rule might also produce an inappropriately low wage. This
occurrence ho w ever is mitigatedby two considerations. The first
is that union wages, to which the 30 percent rule is most likely to
apply, nearly always exceed non-union wages. Secondly, the GAO has
observed that the market will ignore inordinately low minimum wages
an d instead provide bids based on the actual prevailing wage.

Importation of Wages Davis-Bacon specifies that the appropriate
geographic applica tion be the '#city, town, village, or other
civil subdivision of the state in which the work is to be performed
T he Department of Labor however has consistently violated the
intent of the law and imported prevailing wages from non-adjacent
counties. The imported rates, in nearly all cases, originated in
urban unionized areas and were applied to less populated areas w
ith a smaller percentage of union labor. In the most extensive
analysis of Davis-Bacon to date, D. N. Gujarati of the University
of Chicago found that "25-38 per cent of building construction and
about 46-73 per cent of highway and heavy construction dete
rminations that were based on union rates used rates frqm
non-contiguous counties and or statewide union wage rates Gujarati
also found that the average distance traveled by rates from
non-conti guous counties was 75 miles hardly a reasonable
commute.

Impo rted wages not only drive up construction costs but also
take work away from local contractors and labor. The latter is
precisely the opposite of the intent of Davis-Bacon. Local
contractors are reluctant to bid on projects with unrealistically
high Davis - Bacon rates primarily because of the accompanying
morale problems. Employees on such jobs receive greater wages than
their equals who were not so fortunate as to be assigned to the
federal project. Also the return to previous wages may result in a
decline of worker productivity.and possibly agitation for union
wages. The intinerant wage of the 1970s has replaced the intinerant
laborer of the 1930s.

Project Classification Prevailing wages must also be determined
on the basis of both project and work. The Department of Labor has
created four major classifications: residential, highway, heavy and
building.

These categories are both large enough.to include highly dissimi
lar projects and yet sufficiently vague to permit an overlap. As 2.
D.N. Gujarati The E conomics of the Davis-Bacon Act Journal of
Business, Vol. 40, No. 3 (July 1967 p. 307. 6 an example of the
former, GAO cited a Cumberland County, North Carolina, contract to
overhaul an. air conditioning unit. Classi fied as llbuilding,'l
the survey inclu d ed such dissimilar projects as the installation
of a sprinkler system in a men's shop and the construction of a
synthetic fibers plant. The wages on the various projects surveyed
possessed a similar degree of diversity a The classification of
Interstate 6 6 in Fairfax County Virginia, as I'heavyll
construction illustrates the flexibility between the major
construction catagories. The majority of the work will be done
under Inhighway rates. However, since it is possible that the
Washington Metrorail system m i ght be extended down the median,
Labor ruled that part of the work must carry Iheavy'l rates despite
the nearly identical nature of work. This decision resulted in a
doubling of many pay rates. Unskilled labor, for instance, will
earn rates of $4.50 on "h i ghway" and 9.68 on IfheaVy.l1 In
summary, Labor's administration of Davis-Bacon has, over the past
twenty years, been marked by inconsistencies in both methodology
and results. Prevailing wage determinations have been, in a
significant number of cases, un realistically high.

This is attributable to both the built in and discretionary
biases in favor of union-negotiated wages.

The extent of Labor's reliance on union rates was revealed in
the GAO's survey of 30 .locations and 277 worker classifications
Table 3 Labor had assigned union rates to 66 percent of the worker
classifications. The GAO found that only 42 percent warranted such
wages THE EFFECTS According to the GAO the Department of Labor's
inappro priately high wage determinations cost the federal go
vernment over one-half billion dollars in excessive labor costs
during 19

77. The GAO also calculated that the Act imposed compliance and
administrative costs of $189.1 million on contractors and another
$12.4 million on federal agencies, including the Dep artment of
Labor. Armand J. Thieblot, Jr testified before the Senate Committee
on Banking, Housing, and Urban Affairs that the cost is at least
one billion dollars, an estimate which he terms conser vative.

These estimates are based on incorrectly determi ned Davis Bacon
rates. There are additional, indirect costs'which occur even when
Davis-Bacon is properly administered. At the very least,
Davis-Bacon sets the average wage as the minimum. In 7 addition,
because of the minimum wage requirement, government demand is
unresponsive to wage costs. This unresponsiveness, in combination
with Labor's tendency to set union rates as prevailing and the
relatively fixed supply of unign labor, strengthens organized
labor's bargaining position. High union rates, and a g eneral rise
in construction costs, result.

Table 3 Comparison of Union-Negotiated and Nonunion Rates Issued
By Labor and GAO Survey in percentages Total rates Union Non- Union
Non Region compared negotiated union negotiated union wage Labor
rates issued GA O survey rates New York 12 97 3 59 41 Atlanta 27 21
79 4 96 Chicago 17 76 24 39 61 Dallas 16 79 21 33 67 San Francisco
28 82 18 77 23 Total 100 66 34 42 58 The United States Chamber of
Commerce has estimated the indirect cost of Davis-Bacon to be $1.8
bil l ion a year and the total cost to be $2.8 billion The Chamber
has also calculated that repeal of Davis-Bacon would lower the
price level by 0.1 to 0.3 percent, reduce the cost of a new home by
$741, and create anywhere from 23,000 to 150,000 new jobs (Tabl e 4
Minorities Davis-Bacon is above all a union protection measure.
Since organized labor's major bargaining tool is control of the
labor 3. John P. Gould, Davis Bacon Act, The Economics of Prevailed
Wage Laws Washington, D.C.: American Enterprise Institut e, 1971 p.
21-22. a U.S Alas Cal D.C Ill N. Y PeMs.

Davis-Bacon also discourages the use of minorities on federal
construction projects. Apprentice rates are often set so high as to
favor use of the more skilled journeyman over the apprentice In
addition, open shop categories such as helpers and train ees are
often unrecognized. These are the major means of minority entry
into the construction industry. Finally, the Department of Labor
often mandates job practices and ratios contained in collec tive
bargaining agreements regardless of whether the contr a ctor was a
party to the agreement. A dramatic example is the Neighbor hood
Based Self Help Rehabilitation Program In areas such as the South
Bronx residents could through their labor purchase the apartments
on which they worked. The "sweat quality" approa c h possesses the
multiple virtues of providing housing, rehabilitat ing
neighborhoods, and permitting the untrained and unemployed to
acquire skills. The program was canceled, however, because in New
York City the appropriate journeyman-apprentice ratio is 12 to 1 If
the ratio was achieved, the entire purposed of the program would be
defeated.

The Department of Labor disposition toward union rates
discourages minority contractors, a vast majority of whom are open
shop, from bidding on federal projects. This not only hurts
minority employment, but also contradicts federal procurement
policies aimed at encouraging minority enterprises Housing The
application of Davis-Bacon to federally-assisted housing is
antithetical to the goal of providing sufficient and i n expen sive
housing for the poor and elderly resources available for housing,
Davis-Bacon will direct a greater amount of funds into wages and
thus reduce the amount available for structures. Section 8 rent
subsidies serve as an excellent example. Since th e federal
government will pay any rental costs in excess of 25 percent of the
eligible rentor's income, it would be in the government's interest
to pursue low rents. The lower the rent subsidies are, the greater
the number of people who receive them will b e . Unfortunately,
Davis-Bacon often drives up the construction cost of federal
projects and thereby reduces the value of the Section 8 dollar With
a given amount oflo An example is a project of 44 units for the
elderly at Keyser, West Virginia. The origina l bid, without
Davis-Bacon was 740,000 or $16,800 per apartment: When Davis-Bacon
was applied the bid jumped to 1.2 million or $27,200 per apartment
Another example is a nine story, 193 unit apartment complex for the
elderly in Grand Rapids, Michigan. It h as been estimated that
Davis-Bacon caused an additional cost of $51,220 or 11 percent of
the entire contract.

Necessity of Davis-Bacon Defenders of Davis-Bacon assert that
the Act is as necessary now as it was during the Depression.
Without it, they charge construction workers would bear the burden
of the frenzied compe- tition for federal contracts.

Nearly 80 percent of all 1977 construction was undertaken within
the private sector. If the thesis that competition results in low
wages is correct, then cons truction wages on the private projects
must be inordinately low. This, however, is not the case.
Construction workers receive nearly double the wages paid to their
counterparts in retail trade. Furthermore, Davis-Bacon if correctly
applied, ties wages on federal contracts to the private market.
Should the wages collapse in the private sector, the federal sector
would follow Proponents of Davis-Bacon also cite an MIT study which
finds that Davis-Bacon rates have a positive effect on
productivity.

Contractor s place their best workers on federal projects as a
reward. (It should be noted that implicit within this defense is
the acknowledgement that Davis-Bacon rates do exceed the prevail
ing rate To attempt to justify Davis-Bacon on these grounds is erro
neous . The productivity of the bidding contractors is a matter of
procurement policy To maximize productivity, without regard to
cost, does not always yield the most efficient result. The intent,
past and present, of Davis-Bacon has never been to offer an incen t
ive for greater productivity CONCLUSION The purpose of Davis-Bacon
was to protect local contractors and labor. The market has proven
.more effective in fulfilling the goals of Davis-Bacon than has the
elaborate and expensive structure constructed by the D e partment
of Labor. Local interests I 11 are best served when prevailing wage
determinations are set so low as to be disregarded. Contractors
will include wiain'their bids the actual prevailing wage. In these
situations the con tracts usually go to local c onstruction.

The heart of the Davis-Bacon question is whether Congress places
a greater value on the benefits received by organized labor than on
the public's desire for more efficient use of the tax dollars,
minority efforts to g ain employment, and the elder ly's need for
decent and inexpensive housing.